Long Term Capital Gains Tax
The Finance Bill 2018 has proposed significant changes in these taxation provisions relating to long term capital gain on transfer of equity shares in a company or a unit of an equity oriented fund or a unit of business trust. By this proposed amendment, long term capital gains tax is introduced and investors will have to pay 10 per cent tax on profit exceeding Rs 1 lakh made from the sale of shares or equity mutual fund schemes held for over one year. Till now, LTCG was exempt from tax. For this, a new Section 112A has been proposed to be inserted in the Income Tax Act. To the relief of investors, gains up to Jan. 31 this year have been grandfathered i.e. they won’t be subject to tax. The amount of Gains made thereafter this cut-off date will be taxed.
Long Term Assets
Long term capital gains means gains arising from the transfer of long term capital assets. A capital assets, being an equity shares or Units of equity oriented funds or units if business trusts, are treated to be long term capital asset if these are held for a period of more than 12 months. The Securities Transaction Tax (STT) is paid at the time of transfer.
Computation of Income Tax (Long Term Capital Gains Tax)
Cost of Acquisition (COA)
The COA will be have be determined inorder to find the profit/loss for computing the taxes applicable. There is a method of determining COA of such transactions has been specifically laid down according to which the COA of such investments shall be deemed to be higher of-
1. The actual COA of such investments;
2. The lower of –
Fair Market value (FMV) of such investments and Sale Price(SP)
The computation of long-term capital gains in different scenarios is illustrated as under –
Scenario 1
An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 250. As the actual cost of acquisition is less than the fair market value as on 31st of January, 2018, the fair market value of Rs. 200 will be taken as the cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 250 – Rs. 200).
Scenario 2
An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 150. In this case, the actual cost of acquisition is less than the fair market value as on 31st of January, 2018. However, the sale value is also less than the fair market value as on 31st of January, 2018. Accordingly, the sale value of Rs 150 will be taken as the cost of acquisition and the long-term capital gain will be NIL (Rs 150 – Rs 150).
Scenario 3
An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 50 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 150. In this case, the fair market value as on 31st of January, 2018 is less than the actual cost of acquisition, and therefore, the actual cost of Rs. 100 will be taken as actual cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 150 – Rs. 100).
Scenario 4
An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 50. In this case, the actual cost of acquisition is less than the fair market value as on 31st January, 2018. The sale value is less than the fair market value as on 31st of January, 2018 and also the actual cost of acquisition. Therefore, the actual cost of Rs. 100 will be taken as the cost of acquisition in this case. Hence, the long-term capital loss will be Rs. 50 (Rs. 50 – Rs. 100) in this case.
In case of transfer made between 1st February, 2018 and 31st march 2018 will be eligible for exemption under clause (38) of section 10 of the act.
Five Points To Note about Long Term Capital Gains Tax
1. The tax liability will accrue only when the income from sale of equity/ equity mutual funds is over Rs. 1,00,000. For instance, if you buy Rs. 4,00,000 worth shares on April 1 and sell the shares on April 3 the year after for Rs. 4,75,000 then no tax liability will occur on account of capital gains because the profit is Rs. 75,000 only and not Rs. one lakh or higher.
2. In case the shares sold have been held for a period of less than 1 year, then the profits arising out of transfer of such shares will be subject to short term capital gains and not long term capital gains.
3. When shares are sold in less than one year, the tax liability will be as per the short term capital gains rules. The existing rate of short term capital gains is 15%.
4. No indexation is allowed in case of sale of equity shares. In case of capital gains on jewellery and real estate, the tax department allows indexation on account of inflation. But this will not be allowed in case of share sale.
5. If the shares are sold before January 31, the profit so earned will not be taxed since the law was announced on February 1.
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